Do All Start-Ups Need a Stock Purchase Agreement?

Here's an interesting question for small start-up companies:

If you're the sole founder in a company, do you have to write up a stock purchase agreement?

It's a good question for many reasons. For one, it's not one that every entrepreneur would think of asking. Many don't realize the importance of having stock purchase agreements drafted at the early stages.

The second reason why this is an important question is because start-ups are often looking to save some money. As such, they don’t need to be drafting any extra agreements, if they’re not absolutely necessary.

First off, what is a stock purchase agreement?

Generally speaking, it’s a definitive contract between the buyer and seller of shares in a company.

A stock purchase agreement is typically seen in closely held companies. It regulates the sale and transfer of the company’s shares. In a typical stock purchase agreement, you’ll find provisions dealing with the right of first refusal and redemption of shares in the event that a shareholder becomes bankrupt, incapacitated, or wants out.

It’s a very important agreement that becomes ever more important as the company grows and adds more investors and shareholders to the mix.

But going back to the question at hand, how important is it to have a stock purchase agreement, if there is only one shareholder?

The first real issue would be securities compliance. Without going into huge detail here, private offerings of limited capacity are generally exempt from the registration rules of the Securities Act. This is called the Regulation D exemption. The one real issue here would be that the shares of the company need to be restricted. This means that they cannot be sold for at least a year, or they have to be registered.

So on one hand, it makes perfect sense to have the restriction documented in a contract. On the other hand, it makes no sense at all if the company only has one shareholder, since these restrictions can be documented in the Board meeting minutes or other place.

So in short, it’s really not mandatory to have a stock purchase agreement if there is only one shareholder. The sole shareholder needs to document their contribution to the company through the Board minutes or through a contribution agreement. But that’s not the same thing as a stock purchase agreement nor is it as complex.

Related Resources:

• Venture Capital Overview (FindLaw)
• Questions About Securities Law (FindLaw)
• Starting a Business On Your Own? 5 Legal Risks (FindLaw’s Free Enterprise)